Dec. 4 (Bloomberg) -- The connection between major national
charities and telemarketers should be investigated by the
Federal Trade Commission for possibly abusing tax-exempt status
or breaking the law, U.S. Senators Richard Blumenthal and Herb
Kohl say.

“I am writing to ask that the FTC investigate reports that
telemarketers acting on behalf of well-respected charities are
deploying deceptive tactics to induce individuals to donate
money that is kept mostly, and sometimes entirely, by the
telemarketer,” Blumenthal, a Connecticut Democrat, wrote to the
FTC on Nov. 30. “These practices are unethical and in some
circumstances may be illegal.”

The three senators say two recent Bloomberg Markets
magazine articles show that the government should take actions
to prevent abuse by tax-exempt organizations.

Kohl, a Wisconsin Democratic, says the U.S. Department of
Justice and the Consumer Financial Protection Bureau should also
probe possible nonprofit abuse.

In October, Bloomberg Markets reported that InfoCision
Management Corp., the world’s largest charity telemarketer,
raised money for the American Cancer Society, the America
Diabetes Association and other national charities while falsely
telling potential contributors that 70 percent of the money
raised went to the charities.

‘Particular Scheme’

“This particular scheme is one that needs to be looked at
closely by the Consumer Financial Protection Bureau, Federal
Trade Commission and Department of Justice to make sure it can’t
happen again,” Kohl says.

The Cancer Society and Diabetes Association approved
scripts for the telemarketers allowing them to lie about where
donations would go, Bloomberg Markets reported.

Senator Blumenthal asked Jon Leibowitz, chairman of the
FTC, to investigate if these tactics violate the Telemarketing
and Consumer Fraud and Abuse Prevention Act.

“These telemarketers use scripts approved by the charities
to mislead potential donors about how much the charities keep,”
Blumenthal wrote. “The scripts are misleading, stating that 70
to 75 percent of funds raised go directly to the charities when
the actual number is far less.”

False Scripts

FTC spokesman Frank Dorman declined to comment. Greg
Donaldson, national vice president for corporate communications
for the Cancer Society says, “We welcome the chance to clarify
the facts and will cooperate fully.”

InfoCision Chief of Staff Steve Brubaker says his company
has been a dependable partner to some of America’s best
charities for decades and takes its obligations to them and to
potential donors seriously.

“Our legal counsel has asked us not to comment on the
merits of these claims other than to say we vigorously dispute
these allegations and will respond accordingly in the proper
judicial forum,” Brubaker says.

The Cancer Society’s 2010 contract with InfoCision for a
telemarketing campaign called Notes to Neighbors estimated the
charity would receive 44 percent of the money raised. Solicitors
used scripts, approved by the Society, falsely claiming that 70
percent of the money raised would go to the charity.

That year, InfoCision kept 100 percent of the $5.3 million
it raised for the charity, according to Cancer Society filings
with the IRS and the state of Maine.

‘Serving People’

The American Diabetes Association approved a script the
same year for use by InfoCision telemarketers.

“Overall, 75 percent of every dollar received goes
directly to serving people with diabetes and their families,”
the script says.

The Association’s fundraising contract for that period
estimated the Association would receive just 15 percent, with
the rest going to InfoCision.

Other of the nation’s largest health charities, including
the American Heart Association, the American Lung Association
and the March of Dimes, have hired InfoCision during the past
decade. The telemarketer brought in a total of $425.5 million
for more than 30 nonprofits from 2007 to 2010, keeping $220.6
million, or 52 percent, according to state-filed records.

The Bloomberg Markets December article reported that the
American Bureau of Shipping, a 150-year old Houston-based ship
inspection company, paid no U.S. income taxes on just less than
$600 million of profits earned from 2004 to 2010.

Chefs, Maids

It paid Robert Somerville, then its chief executive
officer, $21.7 million during that time. ABS allowed managers
perks such as chauffeurs, chefs, maids and first-class travel.
The Internal Revenue Service doesn’t have rules against such
spending by nonprofits.

That caught Senator Grassley’s attention.

“The laws and regulations that govern tax exemption are
too vague or poorly enforced,” Grassley says. “Congress and
the IRS have a responsibility to tighten up the laws that
undermine tax fairness.”

Other nations reject the tax-free status accorded to
ABS by the IRS.

“The recognition of this type of entity as tax exempt is
somewhat unique to the United States,” ABS told Bloomberg
Markets in a written response to questions.

Exemption Rescinded

In 2010, China’s State Administration of Taxation rescinded
ABS’ tax exemption retroactive to the beginning of 2008. ABS
paid $20 million in current and back income taxes.

The South African Income Tax Court denied the ABS
application for tax-exempt status in 1997. The company lost an
appeal in 2008.

“The appellant simply does not qualify,” ruled High Court
Judge Eberhard Bertelsmann. The company also pays income taxes
throughout most of Europe.

“Just as Congress considers the corporate tax reforms
other countries have enacted, it’s fair to look at what those
countries are doing with their tax-exempt entities,” Grassley
says. “The American Bureau of Shipping’s loss of tax exemption
abroad should raise red flags for the IRS.”

ABS spokeswoman Jean Gould says the company fulfills a
vital role of promoting safety at sea and serving the public
good. “ABS has been a tax exempt entity for nearly a century
and fully supports appropriate oversight of US tax-exemption
law,” she says.

Grassley says these issues may become especially relevant
if negotiations to avert the fiscal cliff lead to changes in the
tax code.

“If comprehensive tax reform occurs, the rationale and
policy behind our tax-exempt laws will be ripe for review,” he
says.